EMD Relative weekly notes
Week Ending August 5, 2016
EMD assets started August with continued momentum as dollar spreads to US treasuries narrowed and local currency assets had a small positive return. The Bank of England joined the chorus of major central banks ramping up stimulus, and future asset purchases there will keep interest rates low and provide further incentive for yield-searching. Additionally, oil prices rebounded from lows after falling below $40 for a very brief period. Inventory re-balancing continues, although a temporary glut of gasoline may prolong a period of correction. A diminishing view of downside risks in oil and other commodities is another plus for emerging markets.
Fund flows continued to be robust this week, and in general foreign exchange reserves continue to build on an absolute basis, although the rate of growth is slower than earlier this year.
However, the much stronger-than-expected US jobs number as the week closed strengthened the US dollar and interest rates rose. That bears monitoring for its impact on EM foreign exchange (FX) in general, although sustaining market enthusiasm for further Fed rate hikes has been difficult as monetary policy has been aggressively eased everywhere else in the developed world. Rising interest rates (see chart below) may pose an additional hurdle to further fixed income returns this year. However, EM spreads-to-treasuries remain right on their historical averages as we showed last week, and therefore the asset class seems far less stretched than others which would be at significantly greater risk should some momentum for higher rates emerge.
The views and opinions contained herein are those of Schroders' investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.'s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.